Additional menu

Solo 401k Providers and Their Scope of Services

posted on May 26, 2015

A reader asked me if there’s any reason not to use TD Ameritrade for a solo 401k. TD Ameritrade offers many Vanguard ETFs commission-free. For more on solo 401k in general, please read Solo 401k When You Have Self-Employment Income.

When I looked into the solo 401k documents from the big 5 solo 401k providers — Vanguard, Fidelity, Schwab, TD Ameritrade, and E*Trade — I noticed one thing. Even though their basic prototype documents are more or less the same, different providers serve as different roles in section 8 of the adoption agreement.

Provider

Role

Allows Roth

Allows Loan

Vanguard

Trustee

Yes

No

Fidelity

Trustee

No

No

Schwab

Custodian

No

No

TD Ameritrade

Custodian

Yes

Yes

E*Trade

Custodian

Yes

Yes

Vanguard and Fidelity serve as the trustee. Schwab, TD Ameritrade, and E*Trade serve as the custodian. What’s the difference? The plan document has a long list of responsibilities for the trustee and another long list of responsibilities for the custodian. I’m not a lawyer. I don’t pretend to be able to match the fine prints and tell the difference.

I’m hoping that by highlighting this difference in the role each provider assumes, someone who knows better will be able to shed more light on this.

Practically speaking, regardless the legal role, is the scope of services any different at different providers?

I only had my solo 401k at Fidelity. I know what it does for the plan. If you have a solo 401k plan at Vanguard, Schwab, TD Ameritrade, E*Trade, or any other provider, please help me with these questions from your experience with the provider:

1. Who’s the provider?

2. What’s on the title of the account? Besides the name of the plan, is the participant’s name also on the account?

Fidelity has both on the account. If husband and wife both participate, they must have separate accounts and it’s very clear which account is under whose name.

3. If you are using the Roth option in your solo 401k, is the word ‘Roth’ actually on the account? If the word ‘Roth’ isn’t on the account, how does the provider know it’s Roth?

Fidelity doesn’t have the Roth option.

4. When you contribute to the plan, is there a process that tells your provider which plan year, which participant, and what contribution type it was for (employee vs employer, pre-tax vs Roth)?

Fidelity has a paper form for this. I heard some providers don’t track. You just put money into the account(s).

5. What document(s) do you receive after the end of the year besides the normal account statements?

Fidelity sends a valuation report with the total beginning and ending balances, total contributions received, total distributions paid, and the total earnings, both for the plan as a whole and a breakdown for each participant.

6. If you take money out of the plan, does the provider file the necessary tax forms with the IRS? If you use the Roth option, you need the tax forms to reflect it’s Roth so that you won’t pay tax on the distribution.

I haven’t taken any money out yet but I believe Fidelity will file the necessary tax forms.

I don’t know whether the mere legal role “trustee” or “custodian” makes all the difference in practice. You still need to understand the scope of services, especially when it comes to tracking different contribution types and issuing tax forms.

Schwab, for example, asks for a second EIN for the plan separate from the EIN of the employer, whereas when you use Vanguard or Fidelity you only need one EIN for the employer. That’s because Schwab only serves as the custodian, whereas Vanguard and Fidelity use their trust company Vanguard Fiduciary Trust Company (VFTC) and Fidelity Management Trust Company (FMTC) respectively for issuing tax forms.

TD Ameritrade and E*Trade both allow loans from the solo 401k plan. I can’t imagine they will be tracking how much was issued as a loan, how much of a deposit was loan payment, how much was interest and how much was principal, how much of the loan is paid off so far, and how much of the loan is still outstanding. If you liquidate the account, the outstanding loan balance has to be part of the distribution. Without accurate tracking, they won’t be able to issue accurate tax forms. Does that mean they won’t issue tax forms anyway, with or without a loan?

Before we have clear answers, I would suggest sticking with Vanguard, Fidelity, or Schwab for your solo 401k.

[Photo credit: Flickr user Shimelle Laine]

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.

Like More Of These? Subscribe!

Reader Interactions

Comments

My wife has a Schwab individual 401k. She set it up to be able to make contributions from her small business earnings and to consolidate all of her rollover IRA’s to make it possible to do “backdoor Roth” contributions w/o triggering a current taxable event.

Provider: Schwab
Title: Her Name, CHARLES SCHWAB & CO INC CUST, Her Business name + “I401K PL”
Roth: Schwab does not offer a Roth option
Contributions: Schwab has a paper form you fill out and submit with the contribution (elective deferral agreement)
Year End Reporting: the same Year-end Gain / Loss report as Schwab provides for tax preferred accounts (IRA’s, Roth IRA’s, Coverdell) and an Account Summary that shows all of the transactions.
Withdrawal paperwork: haven’t done any, but I can’t imagine that Schwab wouldn’t provide what is needed.

Another question you might ask is whether they provide additional information for IRS Form 5500 which is required when the account has more than $250 k in it.

Great Article. This is the sort of information that is really useful for those of us with / contemplating a self-employed 401k. I have not seen this particular information on any other blog or media outlet. Thanks!

Not sure if this helps but I recently started a 401k solo with E-Trade. I have both Roth and Traditional which are designated as separate accounts to which I can make separate contributions. Contributions are tracked in the dashboard so I can see the contributions for each year and maximum contributions for each year. I can also designate new deposits to be contributed for a specified year. (i.e. I can choose to contribute funds through the specified deadline in 2016 for the 2015 tax year or make new contributions for 2016.) Deposits can be made at any time from a bank account. It is very easy.

I have just downloaded the loan kit and I am now reviewing those documents. It appears that the loan process will be slightly more difficult in terms of setting loan terms, repayment and tracking. It is nice to know however that I have the option should I decide I would like to make the funds more liquid. Hopefully this helps.

Setting up a Solo 401k through a big bank sort of negates the whole point. If you want to take advantage of the capabilities of a Solo 401k, you should get an account that is ACTUALLY SELF DIRECTED. This means you need to set it up through a firm that specializes in creating a Solo 401k with checkbook control and no custodian. All they do is self directed IRA and Solo 401k accounts – with check book control. They set up your Solo 401k with NO CUSTODIAN. In other words, you don’t need to ask permission to make an investment….you write the check. Truly self directed.

“Setting up a Solo 401k through a big bank sort of negates the whole point”

That’s ridiculous. The primary point of a solo 401k is to maximizes tax-advantaged savings from self-employment income. Using a brokerage does not negate that.

If you happen to want to use those savings to chase investments beyond stocks/bonds/mutual funds then you may need to find a platform broader than these brokerages – and assume the additional cost and risks that go along with it.

Which brokerage house do you work for? Who do you “represent”. The problem with most brokerage houses is the fact that they represent certain “investment opportunities”. Like the recent insurance company ad I hear on the radio that says something like “We shop for the best rates from the insurance companies WE REPRESENT….blah blah blah (we represent)….so the shop from the companies that pay them to sell policies!! This is limiting – in other words what’s the point of “self directing” when someone else is directing your investments?…with only a menu of companies or investments that they represent??? I know that not all people in the investment industry are crooks – but clearly many are.

Lars – Ha, I don’t represent any brokerage. I do have (or had) accounts at a few like TD Ameritrade, Fidelity, Vanguard and not once did they push me (or even give me a call to offer) into an investment opportunity they represented. The ‘worst’ that they have done was give preferential pricing to some low cost ETFs or mutual funds that I actually wanted to buy – oh the horror.

Look, your welcome to your silly paranoia and to rant about it on the internet (that is what it is for, right) – but nobody else needs to pretend it is rational, sane or something that should be taken the least bit seriously.

You’re missing the point, and your tone is telling. People self direct to self direct, not to hand over the keys to someone else who’s motivation is not their own. My paranoia?….look at the facts. Do some research on how banks are compensated. Why do you think the Wells Fargo CEO was in front of the cameras this week? I’m pretty sure it had something to do with him “encouraging” employees to push products on to their customers. Why do you suppose a CEO would do that? It is because they charge fees for these products. That is how they make money.

You are right, tone tells you a lot and paranoia is definitely what is on display here.

First, you introduced ‘self directed’ into the conversation – the primary reason for a Solo 401k (just like the primary reason for an IRA) is not to have a ‘self directed’ account. That would be a reason to get a Self-Directed IRA or 401k, but that wasn’t the topic here and isn’t of interest to most people as they realize they can get nearly the same risk/return profile on their investments without the additional costs/hassle and risk of alternative investment through stocks, mutual funds and bonds available through any brokers platform. In other words, it is you who has missed the point.

As for facts and research – once again you let your paranoia shine through. The CEO of Wells Fargo was in front of cameras not because they encouraged cross-selling, but because they had no controls in place to ensure that the recorded cross-sells were legitimate and not fraudulent. It was that customers had a choice to say no and exercised that right that got them in trouble. Yes, banks are for-profit enterprises that are looking for ways to make money, luckily I only have to use their products when their interests provide me with a benefit that exceeds the cost – my no account fee TD Ameritrade solo 401k with no-trading fee ETFs are a shining example. If I stopped doing business with every entity that was engaging me so that they could make a profit I would be living a very spartan, very sad existence – is that why you are so angry, your paranoia has let you to that existence?

Here is some free advice, it is worth what you paid for it (another reason profit motive isn’t all bad): Tank off the tinfoil hat, walk up the stairs from the basement, take a deep breath and open the door and walk outside. The sun may feel strong at first but you will adjust back in no time – it will be very healthy for you to get some fresh air.

That investor alert is nothing new. It’s a shame that people need to be warned about scammers. Of course the argument could be made that most if not all wall street investments are in fact scams. It doesn’t take a whole lot of research to determine that many of the so called advisors are self serving. Buyer beware. Who’s watching the watchers? The ratings agencies are complicit. The sec is run by who???

I’m not sure where the paranoid comment comes from. I’m also confused about the anger comment. I guess maybe that’s called projecting? Anyway, I suggest that anyone reading this commentary do their own research and come to their own conclusions. Whoever this Alan guy is clearly has some delusions of grandeur when it comes to the financial industry. The facts speak for themselves. I don’t need to name call. The internet is full of trolls like Alan who try to pick fights by calling names. I’m above that. If Alan thinks that investment banks’ interests are aligned with his, than that’s fine with me. If Alan wants to ignore the lawsuits, huge settlements, bailouts, and continual investigations into impropriety, that’s his choice.

Delusions, another good choice of words for your paranoia. The facts do speak for themselves, the big bad evil investment banks provide useful services to hundreds of millions of people even though their interests are their own profit – just like consumer goods companies, manufacturing companies and even the firms who provide you self directed 401k plans…

One need not ignore the imperfections and poor actors to see that choosing to avoid the industry completely is as irrational as refusing to use the US mail because they occasionally lose pieces or refusing to get in a car because accidents happen so frequently or ceasing to eat food because sometimes you choke on it.

But yes, you are correct that anyone reading this can come to their own conclusions. And the internet sure is full of something.

Primary Sidebar

Search

Connect

Privacy Policy

FTC Disclosure

Please note that The Finance Buff has financial relationships with some of the merchants mentioned here. The Finance Buff may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.